Many lawyers dream of starting a law firm. The entrepreneurial spirit inspires these lawyers to hang out their shingle and open their own law firm. Some lawyers even open their own law firm straight out of law school.
Other lawyers start a law firm due to circumstances outside of their control. Layoffs, a breakup of their old firms, or fatigue over working for someone else often result in the formation of new law firms.
Regardless of your reason for starting a law firm, you want something that will last. You want to provide sound legal services to your clients. And you want something that will generate a comfortable living for you and your family.
Read on for a complete guide explaining how to start a law firm.
Should You Start a Law Firm?
You need to make an enormous commitment when you start your own firm. When you have your own business, you have responsibilities and liabilities that an associate or even a shareholder in an established firm can avoid. At the same time, you have control over your own practice.
No one can tell you whether you should start a law firm. But you should carefully consider the pros and cons of trying to act as a business owner while maintaining a law practice.
Pros of Starting a Law Firm
The pros of having your own law firm usually come down to control and compensation. While clients will still have emergencies on weekends and after hours, you decide which clients to accept and which to decline. You also decide how many clients to represent.
You get to pick your office space, choose your staff, and set your office policies. If you want to dress casually every day of the week instead of only having casual Fridays, you can do that. Most lawyers complain that they could run a law firm better. Starting a law firm gives you the chance to prove it.
You also have financial control of your law firm. You decide how much to spend on overhead and, assuming your revenue projections work out, how much you take home.
Cons of Starting a Law Firm
You will probably spend more time working since you will have both administrative tasks and your law practice to attend to.
As a business owner, you are responsible for everything in your law firm. You and your law firm bear liability for:
- Legal errors
- Work-related injuries to your staff
- Premises-related injuries to your clients
- Payments to vendors and service providers
If anything goes wrong in your law firm, you could end up on the receiving end of a lawsuit.
And while you have financial control over your law firm, you also bear the financial risk. If one of your clients moves their work to a different firm, you might need to forgo paychecks until business picks up again.
As the owner, knowing how to start a law firm includes knowing when you need to make sacrifices. You must make sure everyone else gets paid before you can pay yourself.
In-House vs. Law Firms
If you are unhappy working in someone else's law firm, you should consider starting a law firm and working in-house with a company. Both present different opportunities to change how you practice law.
Opening your own firm comes with a lot of stress and responsibility, beginning with learning how to start a law firm. But opening a law firm also gives you total control over your law practice. You will control everything from where your office space is located to the furniture you buy.
Going in-house will get you out of the law firm environment. When you go in-house, you will work as an employee of a company. You will work with non-lawyers within the company to address the company's legal issues. You will also coordinate with outside law firms to tackle litigation or transactions too big for the company's legal department.
Opening a law firm is a big commitment of time and money. You should make sure you have considered all of the alternative possibilities before committing.
Starting Your Own Law Firm: Nine Steps to Follow
There is no recipe for how to start a small law firm. Instead, you should gather information from as many sources as possible and synthesize the information into a plan that addresses your law firm goals for your law practice. Here are nine steps that can help you start a new law firm:
Creating a Law Firm Business Plan
A business plan sets out the goals for your law firm and how you expect to achieve them. It addresses several issues relating to the formation of a new law firm, including:
As you develop the business plan, remember that the process is just as important as the result. Thinking through the plan and putting it into writing will focus your mind and ensure that you address every issue, including matters you might have otherwise overlooked.
For example, as you prepare your financial projections, you will often think of overlooked expenses like postage or copier toner. Instead of focusing only on startup costs, ask, "how much does it cost to start a law firm and keep it running?" This will help you identify both startup and operations costs early in the process.
Specifying Your Law Practice Area
Many lawyers who start a law firm already have an established practice area. While you should always keep an open mind about adding to the services you offer, you should also focus on legal fields you know.
If you plan to start a law firm out of law school or after working in-house, you may have more flexibility in choosing a law practice area. You will consider many factors when choosing a practice area, including:
- Areas you know and enjoy
- Fields that meet client demand
- Services not provided by other lawyers or law firms
The critical factor is your potential client base. Focus on a practice area where you will get the clients needed to support your business.
Registering/Licensing for Your Law Firm
You might be surprised how little you need to do to open a law firm.
You must be a lawyer to open a law firm. In most states, prosecutors can file criminal charges against anyone practicing law without a license.
In some states, the state's courts administer bar admissions. In other states, the bar association or the state's board of bar examiners handles the admission of new lawyers.
Admission to the state bar usually requires you to:
- Graduate from an ABA-accredited law school
- Pass a background check
- Take and pass the state's bar examination
Some states have reciprocal admission if you are already licensed in another state. You will still need to apply for admission, but the state will waive the requirement to pass the state's bar examination.
Once you have a license to practice law, you can open your own law firm. But before you start searching "what do you need to start a law firm," you should consider the responsibilities you will shoulder in your own law firm.
You will bear liability for any errors or omissions in your practice. Even if you have malpractice insurance, you could lose everything if you make a mistake.
You could also harm a client with your mistake. And if the client files a complaint against you for violating the rules of professional conduct, you could get suspended or disbarred.
Instead of rushing to start your own law firm straight out of law school, consider working for someone else first. If you do not want to work for a big law firm, find a small firm or solo practice where you can work under a mentor for a while.
Once you have some experience handling cases on your own, start working on how to start a law firm. When you strike out on your own, consider opening a law practice with partners instead of a solo practice.
Having colleagues in your firm spreads the responsibilities of being a business owner across more people. You also have others in your office to help with cases. You worked hard to get your law license, and you should take steps to avoid losing it.
Beyond getting your law license, you will probably need a business license from your city and county. Some states also require you to register your business with the state to ensure you pay your state's business taxes.
Defining Your Law Firm Structure
Check your state's bar rules about the structures allowed in your state. In most states, you can structure your law firm as a:
General partnerships and sole proprietorships provide no limitation on liability for claims against the law firm. As a result, the lawyers could lose their personal assets if the firm gets sued. LLPs require one general partner who has unlimited liability as well, so LLPs are also rare.
Instead, most lawyers starting a law firm form an LLC or professional corporation. LLCs and professional corporations offer limited liability. The main difference comes from their tax treatment.
Shareholders of professional corporations are subject to double taxation. The law firm pays income tax on its client revenues. The shareholders also pay income tax when the firm pays them a salary or dividend.
As a result, the same dollar gets taxed twice. But suppose the shareholders choose to leave profits in the corporation instead of paying them out to shareholders. In that case, that money only gets taxed once, and the firm has working capital in its operating account.
Members of an LLC can elect to treat the LLC as a pass-through tax entity. Under this tax structure, each member owes income tax on their share of the LLC's revenues. This avoids the issue of double taxation. But it also means the members pay taxes on revenue regardless of the distributions from the firm.
For example, suppose that a firm has $400,000 in taxable income. The LLC's owners will pay taxes on the entire amount even if they only took draws amounting to $300,000 and left $100,000 in the firm's operating account as working capital.
Check your state and local laws to determine your registration requirements. In most situations, you will need:
- Registration with the secretary of state's office in your state
- Federal employer identification number (EIN)
- State taxpayer identification number
- City or county business license
You will need to register your entity first. Your state will require articles of organization or incorporation to form the entity. The state will run a name check to ensure your entity does not have the same name as any other active registered entity.
You can apply for your tax ID numbers after your entity gets registered. The IRS and state will not issue your ID numbers until you have a registered entity.
In addition to these mandatory registrations, you can also opt to register trademarks in your firm's name. In most states, you will file a state trademark application with your secretary of state's office. You can also file a federal trademark application with the U.S. Patent and Trademark Office.
You will receive trademark registrations as long as your firm name is not confusingly similar to any previously registered trademark.
Insurance is one of the most important aspects of modern business practice. In most states, a law firm must have:
- Professional liability insurance also called malpractice insurance
- Workers' compensation insurance
Most state bar associations require lawyers to affirm that they have malpractice coverage. This policy pays claims against you for errors and omissions you commit while practicing law.
Most states require you to have workers' compensation insurance if you have employees. This insurance pays claims for work-related injuries and illnesses.
While not required, you should also consider:
- General business liability insurance to cover accidents in your office
- Group health insurance
- Disability insurance for the firm's owners
In most situations, insurance premiums are usually much less expensive than the casualty covered in the insurance policy.
Setting Out the Minimum Budget
How much would it cost to start a law firm? To learn the answer, you should create a budget for both starting and running your law firm. Remember that many costs on your startup checklist are not recurring. As a result, your expenses will drop considerably once your firm is up and running.
You need office equipment like:
- Document scanners
- Phone system
You should compare the costs of buying and leasing equipment. Sometimes, leasing allows you to get office equipment with lower costs upfront.
You might not appreciate how much software you need and how expensive it may be. A modern law firm usually has software for:
- Office productivity
- Document management
- Docketing and calendaring
- Law practice management
- Time tracking and billing
Many legal industry software developers make their programs compatible with other products. Approach your office software as a system, so you have components that work together rather than standing alone.
Furniture and Office Equipment
Once you have arranged for a law office, you can decide how to furnish it. If you rent an office suite, the space might come furnished. Otherwise, you will need to decide what furniture will fit your needs and the space.
You have many options for furnishing office space today compared to a few years ago, including:
- Office desks and chairs
- Comfortable chairs for clients in offices and waiting area
- File cabinets
- Tables and chairs for meeting and conference areas
- Desk lamps
- Desk and equipment for the reception area
How you set up your law office depends on your clients, your staffing needs, and your preferences. If you have a staff-intensive practice, like litigation, you might need an office for you, your staff, and your files.
Even if you know how to start a law firm on a budget, you may need tens of thousands of dollars to rent an office, buy furniture and equipment, and purchase marketing.
You have a few options for funding the startup of your own business. You could tap into your savings to fund your law firm.
But you need to be careful about depleting your savings account too much. Calculating how much money to start a law firm is just part of the equation. You also need to cover your living expenses. Your law firm may take several months to become profitable, and you may need to live off your savings until you can draw a paycheck.
You can also take out a small business loan or secure a line of credit. Your bank will explain what you need to get a business loan or line of credit, but you should expect your bank to require:
- Copies of your articles of incorporation or organization
- Your EIN
- A copy of your business plan
Depending on your bank, you might also need to personally guarantee the loan.
Online Marketing Efforts
You need to put your name out there so clients can find you. Even if you have portable clients from your previous job, you still need new clients to keep your pipeline full after you start your own practice.
One of the most efficient and effective ways for a potential client to find you is through your online presence. You need your law firm's website to show up when a potential client searches for your name or your practice area. You do this through search engine optimization (SEO) and pay-per-click (PPC) advertising.
SEO is a set of techniques designed to optimize your website so that search engines index it with your desired keywords. SEO techniques adjust both the visible and invisible content on your website to make that happen.
PPC is an advertising option offered by platforms like Google and Facebook. Your ad gets served at the top of the search results when people search for your desired keywords. You only pay the platform when someone clicks on your ad and goes to your website.
Collecting Referrals from the Start
Many lawyers only think about how to start a law firm after deciding to leave their prior job. But building a referral network starts from the time you enter law school. Members of your class, colleagues at your first firm, and even judges can provide client referrals to help you get your law practice off the ground.
Collecting referrals usually requires two elements. First, you need to network. Attorneys can only refer clients to you if they know who you are and what you do. You should join professional organizations and spend time around other attorneys. And when you start your own business, make sure you put the word out to your referral network.
Second, you need to have a stellar law firm reputation management. Other attorneys will notice that you work hard and provide excellent client service. When an issue arises in your legal field, these attorneys will steer the client to your law firm.
Joining Legal Directories
The more places your name appears, the better the chances are that you will generate client leads.
Your marketing plan should include creating profiles on legal directories. These directories, like Lawyers.com, Martindale-Hubbell, and Avvo, can capture clients searching for a lawyer in a particular area or practice field. Other lawyers also use these directories when helping a client find local counsel.
The benefit of these legal directories is that they often provide review and rating information for lawyers. If you produce good outcomes for your clients, they can leave a review for you on the website. The directory website will also rate you based on peer reviews or legal background.
Your staff can make you much more efficient and profitable. As you think about how to open your own law firm, you should not overlook the value of a good paralegal or legal assistant.
You have many sources for finding good staff members. You can use legal temp agencies. Many of these agencies can supply a temporary employee to "audition" for your staff.
If you like the staff member, you can hire them away from the temp agency. The benefit of hiring a temp is that you can measure how much work you have before committing to a full-time hire.
You can also hire staff on a contract basis. Again, the benefit of a contractor is that you can hire them on an as-needed basis. When your law firm gets busy, you can bring someone in to share the load. But when work slows down, your law firm is not committed to paying the staff member's salary and benefits.
If you need a full-time employee, it often works well to hire someone with whom you have an existing working relationship.
Not every law firm will need to hire consultants. But nearly every lawyer needs a mentor and guide. If you do not have anyone who fills that role, you might consider hiring legal experts to help you build your own law firm.
A consultant can help you with everything from how to start a solo practice law firm without getting overwhelmed to calculating the cost to start your own law firm. Some consultants even claim to know how to start a law firm with no money.
The benefit of working with a consultant is that they have helped many lawyers who are starting a law firm. These experts can provide techniques and ideas they have tested with other attorneys.
You can also bring consultants in to help with specific issues. If you need ideas for using technology to make you more efficient, a law firm technology consultant can provide guidance. If you need help developing a more effective website, a law firm marketing consultant can guide your website redesign.
Just keep in mind that consultants can get expensive. And when you start your own law office, you might not have the funds to get expert advice.
Skills Required to Run a Law Firm
The skills you need to run a law firm differ from your skills as a lawyer. Some skills you need as you learn how to start a law firm and keep it running include:
- Budgeting and sticking to a budget
- Understanding when to handle matters yourself and when to seek outside advice
- Managing staff
- Allocating your time between your lawyer and administrative duties
- Making decisions in the best interests of the firm
Unless you took a course in law firm management, you will need to learn the skills you need by watching someone else manage (or mismanage) a law firm, talking to a mentor or consultant, or trial and error.
Bringing It All Together
Since every firm is unique, there is no easy way to learn how to start a successful law firm. But there are some common steps that all law firms must complete, like getting enough insurance coverage. And there are some common mistakes that many firms make, such as neglecting the importance of cash flow.
As a result, understanding how to make your own law firm requires deep thought into what you bring to the process. You must understand your strengths and weaknesses to know where your plan is strong and where you might have overlooked an important issue. For example, if you have no background in accounting, you may need help with your budget.
Unfortunately, all law firms go through growing pains. But as you develop your plans, your research into how to set up your own law firm can help you build a stable law firm that will bring you professional fulfillment throughout your career.
One area where expert help is available is in marketing strategy. Check out the services a professional law firm marketing agency can offer as you learn how to start a law firm.